ROGUE YOGURT

The weekend was warm, the type of weather that puts a jingle in the cash register of anyone with something sweet and cold to peddle. Customers lined up out the door of Doug Gunn's I Can't Believe It's Yogurt shop in Boulder.

The frozen-yogurt racket had proved a tough go for Gunn, harder than he figured when he quit his oil company job and opened an ICBIY franchise.

But things were going fine that weekend in July 1994. Until one of the big guys from Dallas-based ICBIY ambled into Gunn's store.

A visit from the head man should not have been a problem, except that Doug was purveying rogue yogurt. The chocolate and vanilla in his machines were counterfeit, fake, not made from the genuine ICBIY yogurt mixes that Gunn had agreed to sell when he inked the franchise deal with ICBIY.

Bill Brice Jr., co-founder and head honcho of the ICBIY chain, is no rube. Frozen yogurt buys his groceries, and his office is a cone's throw from the small yogurt mill that grinds out all of ICBIY's trademark product. If there is phony yogurt in an ICBIY store, Brice's tastebuds will tell the tale.

Brice and his wife were in Boulder on vacation, visiting friends. As fate would have it, they stopped by Gunn's store for a little after-dinner treat. Doug was so busy, he didn't even notice Brice come through the line. And damned if Brice and his wife didn't order one chocolate and one chocolate-vanilla swirl. Both nonfat.

Gunn was busted.
"When Mr. Brice tasted the product, he sensed it might be counterfeit," says a July 15, 1994, letter from ICBIY summarizing the fateful day. "He glanced up in time to see an employee exiting the store's walk-in freezer, and observed a yogurt mix carton that clearly did not bear the I Can't Believe It's Yogurt label."

It was showdown time. Brice confronted Gunn, who not only 'fessed up, but turned in his brother Mark, as well. Mark Gunn was also selling bogus yogurt at his ICBIY franchise in Aurora, Doug told the high sheriff.

And the Gunn brothers were making no apologies for the contraband stacked in their freezers. "We were definitely in violation, and we knew it," says Mark. But ICBIY had jerked the brothers around so many times on deliveries, he adds, they figured they had to make truck with another supplier to keep their stores from going under.

Brice returned to Dallas, and ICBIY quickly moved to run the Gunns out of their corporate territory. The two men's franchises were canceled, and ICBIY sued them in U.S. District Court in Denver for breach of contract.

But the Gunn brothers are going down fighting, and earlier this year they fired back, suing ICBIY and Brice in Dallas County District Court for, among other things, defamation, fraud and deceptive trade practices.

The Gunns discovered that they were by no means the only ICBIY purveyors who have hawked counterfeit frozen yogurt. Customers who shelled out money for ICBIY's genuine yogurt in at least 55 locations across the country in 1994 actually were buying cheaper substitutes.

The problem was serious enough that in September 1994, the company felt compelled to declare a general amnesty. Store owners were told they could confess to their wrongdoing, pay the company some money and escape further punishment.

"During the past few months, we have accumulated evidence that an alarming number of [ICBIY] franchisees and licensees have offered counterfeit frozen yogurt products under the I Can't Believe It's Yogurt banner," states a September 30, 1994, memo written by company general counsel Charles Cannon that was sent to all ICBIY franchise holders.

In the future, the company sternly informed its franchise holders, counterfeiting problems would not be so easily forgotten.

The amnesty program worked, company officials say, and the counterfeiting of product is now under control.

But another stain on the good name of ICBIY is growing in its place.
During the course of investigating ICBIY's operations for their lawsuit, the Gunn brothers say, they have discovered evidence that the company has been misleading store owners--and the public--about the ingredients in its frozen yogurt.

For years ICBIY literature touted the high quality of the company's pricey yogurts, boasting that they were made with fresh milk straight from the cow. Nutritional brochures available at ICBIY stores told customers that the company "built a dairy to satisfy the increasing demand for our great-tasting product."

But it turns out that sometime around 1990 ICBIY jiggled its recipes and started using primarily powdered milk to make its yogurt, says attorney Steve Khoury, who is representing the Gunns in their lawsuit against ICBIY.

During a deposition taken in the case, Khoury says, the head of the company's factory acknowledged that ICBIY decided to save some money by replacing much of the fresh milk it used with powdered milk mixed with water.

"They claimed basically to all the franchisees and the world generally that they were making their product with the highest-quality ingredients, specifically including farm-fresh milk. Milk straight from East Texas farms," Khoury says. "We have found out that approximately since 1990 they have been manufacturing the product with milk powder and water."

With milk being the biggest ingredient in yogurt, Khoury says, the company's switcheroo violated the Texas Deceptive Trade Practices Act and forms the basis of the fraud allegations that the Gunns have now leveled against ICBIY.

Tom Herskowitz, the company's executive vice president and chief financial officer, acknowledges that the company has increased the amount of powdered milk it uses, although he doesn't like calling it "powdered milk."

"That is a term that their attorney keeps throwing up to give the illusion of boxes of powdered milk that you buy in the store and people have tasted, and they have a negative connotation on it," Herskowitz says. "I shy away from saying `powdered milk,' because it leaves a connotation that is not accurate. It is reconstituted milk, and it is properly labeled on all our containers."

ICBIY honchos vehemently deny that the "reconstituted milk" has made any difference in the quality of their yogurt. They say they have not misled anyone.

Some dry milk has always been used in the ICBIY recipes, company officials say. In fact, you can't make frozen yogurt without some dry milk, and you can't use any fresh milk at all to make nonfat frozen yogurt, they claim.

"There is absolutely no difference in taste, quality or nutrition between using a powdered milk versus a liquid milk," Herskowitz says.

Brice calls the powdered-milk hubbub a "tempest in a teapot" and predicts that the Gunn brothers "will be made to look silly when this case gets to court. Their claims are ridiculous."

But in the frozen-yogurt business, public opinion can be as fickle as the weather. The questions swirling about ICBIY are not welcome at a company already struggling with a steady meltdown of its frozen-yogurt business.

The story of ICBIY's birth is now a small legend in the annals of Dallas business. Bill and Julie Brice, then teenage students at Southern Methodist University, purchased two ailing frozen-yogurt stores in 1977 for $10,000.

They educated themselves in both business and yogurt making, and slowly built a mini-empire that, at its peak, counted 400 stores across the country.

Timing and hard work paid off for the brother-sister team. They managed to catch the wave of the growing popularity of frozen yogurt in the 1980s. By 1983 they began offering franchises. For a fee, would-be store owners could sign up, use the ICBIY name and sell the company's patented yogurt products.

Franchise holders pay the parent company a 5 percent royalty on all the yogurt they sell and contribute another 2 percent of their sales to a special fund that is supposed to pay for the costs of advertising and promoting ICBIY products.

Competition in the field became stiff over the years, but ICBIY persevered. Although it never reached the size and success of archrival TCBY, the company did well and was often honored as one of the best-run franchise operations in the country.

The Brices cultivated a warm and fuzzy corporate image. Franchise owners were all referred to as "family" in company literature, which abounded with glowing affirmations of the company's dedication to the virtues of honesty, integrity and quality. The company set up its own "Yogurt University" in Dallas, a one-room affair where new store owners came to be inculcated in the ICBIY way of doing business.

The Brices' success ultimately led them to create The Brice Group, an umbrella company that runs ICBIY and is also dabbling in new ventures such as chicken and sandwich restaurants. ICBIY is trying to take its yogurt to the world, granting franchises in foreign countries where the frozen-yogurt markets remain untapped.

The company, however, remains headquartered in a Dallas industrial park, in a maze of cubicles and gray textured hallways next to the manufacturing plant that churns out frozen yogurt mix in half-gallon cartons. Displayed on shelves in the building's lobby are the various awards Bill and Julie Brice have garnered over the years for their business acumen--a couple of eagle statues, a gold apple, an obelisk and several inscribed wedges of glass.

In 1985, the business paths of the Brices crossed those of the Gunns.
Dr. Marvin Gunn, a radiologist from Salina, Kansas, set up his oldest son, Greg, with an ICBIY franchise in Tulsa, Oklahoma. Dr. Gunn put up the franchise fee, and Greg Gunn operated the store. Frozen-yogurt stores were faring well at the time, and Greg's success was noticed by brother Mark, who was then working for an Oklahoma pipeline company.

Mark decided to try his hand in the yogurt business. In 1986 Dr. Gunn again paid the franchise fees--this time $32,500--so that Mark could open two ICBIY stores in Colorado. Mark's twin brother, Frank, ended up taking over one of those franchises in 1991.

In the meantime, yet another Gunn brother--Doug--paid $20,000 for the franchise rights in Boulder.

At one point, four Gunn boys were operating four different ICBIY stores, three in Colorado and one in Oklahoma.

The Oklahoma store encountered relatively few problems, and Greg Gunn remains a member of the ICBIY "family." He recently renewed his franchise agreement for another ten years.

But the Colorado Gunns did not reap the bounty they expected from their franchises. In part, they fell victim in the 1990s to the glut of frozen-yogurt outlets that were springing up across the countryside. As frozen yogurt caught on with the public, more and more stores opened up. Then everyone from grocery stores to corner markets started selling the stuff, and stores selling only frozen yogurt lost much of their drawing power. Across the country, such stores started going belly-up as quickly as they had opened. Several chains went into bankruptcy or were forced to sell out to competitors.

ICBIY managed to stay in business, but Colorado was never a stronghold for the Texas-based company. It was able to open only seven stores in the state, three of those belonging to the Gunns.

As a result, Mark Gunn says, the brothers had problems getting their fair share of frozen yogurt. ICBIY supplies its stores through a network of independent distributors across the country. The distributors buy ICBIY's products from the Dallas factory, then resell them at a markup to the individual stores.

With so few stores in Colorado, Mark says, the ICBIY contract wasn't very profitable, and the company had trouble keeping a distributor to supply the Colorado operations.

Once, he says, the distribution system broke down completely, right before a holiday weekend. Faced with one of his heaviest sales periods and no yogurt, Mark Gunn convinced his twin brother to rent a U-Haul trailer and drive a supply of frozen yogurt from Kansas to Colorado.

At other times, Mark says, he had to drive to Colorado Springs or Phoenix to pick up his supplies. ICBIY was not acting too kindly toward the Colorado members of its "family," he adds.

Not only were supplies unpredictable, he says, but there were quality problems as well.

In 1990, some of the ICBIY cartons that did arrive in Colorado were not full. Since franchise owners paid for the yogurt by weight, Mark Gunn says, he was effectively paying for yogurt he never received. After complaining to ICBIY and getting no response, he called the Colorado Department of Agriculture, which sent one of its weights-and-measures inspectors to check out a load of ICBIY yogurt.

The inspector found most of the cartons in the shipment underweight, Agriculture Department records show, and would not allow it to be sold in the state. The load of yogurt had to be shipped back to Texas. Underfilled cartons also were found by inspectors in Florida and Oklahoma. ICBIY officials attributed the problem to a faulty valve on a new packaging machine. The company ended up offering reimbursements to its stores for the yogurt they had been shorted.

But the ongoing problems had gotten even worse by 1994, when Mark and Doug Gunn owned the only two ICBIY stores left in Colorado. Frank Gunn had turned his ICBIY franchise into a regular convenience store, and the other owners had closed down completely.

The supply line to Denver kept getting stretched thinner and thinner. "We would run out of cups and stuff," Mark Gunn says. "We were just scrounging to keep things going."

Under the franchise agreement, the Gunns were not allowed to buy anything but ICBIY supplies. Given the problems Mark and Doug were having with ICBIY's supply chain, however, they decided to cover their bases. They started buying frozen yogurt from another company, one that could supply them steadily, Mark says. They still sold mostly ICBIY yogurt but added a second brand to their stores.

Mark Gunn admits that the brothers did not inform customers they weren't getting legitimate ICBIY yogurt. "We weren't telling them," he says. "We felt at that point we had no choice. We were the only stores left in the state of Colorado, and we had to look out for ourselves."

ICBIY vice president Herskowitz agrees that getting supplies to Colorado was difficult at times, but he says the company always managed to do it. The Gunns, he adds, are vastly overstating the extent of their problems to rationalize their illicit turn to counterfeit product.

"We did get the product to them on a consistent basis," Herskowitz says. "And they used counterfeit product before they ever had any [distribution] problems."

Both sides agree that the Gunns fell behind in their royalty payments to the company and almost lost their franchises in 1993. Mark Gunn says he and his brother withheld the royalties because ICBIY wasn't living up to its promises but adds that they ultimately paid the fees.

Relations between the Gunns and ICBIY were already strained, therefore, on the day Bill Brice showed up and caught Doug Gunn selling counterfeit yogurt.

When their ICBIY franchises were revoked for selling bogus yogurt, Mark and Doug Gunn renamed their stores Not Just Yogurt and stayed in business. They now buy their supplies from a different manufacturer, and Mark says business is holding steady.

But the Gunns and ICBIY still have a host of legal battles that are far from settled.

The company is suing both brothers for back royalties it claims they still owe. In addition, it is suing Doug Gunn for continuing to operate a frozen-yogurt store in violation of a clause in the franchise agreement that prevents him from competing with ICBIY (although there is not an ICBIY store in Boulder with which Doug can compete).

Earlier this year, Mark Gunn got fed up with ICBIY's legal tactics. He took his vacation time and went to Dallas to picket ICBIY headquarters and some of the company's Texas locations. Gunn became a self-appointed watchdog, trying to sound the alarm among other ICBIY franchise owners and customers that ICBIY is not the warm and fuzzy company depicted in its carefully cultivated public image.

The company responded by suing Gunn in Dallas, obtaining a temporary restraining order to keep him from standing outside the ICBIY stores with his protest signs.

By the time he arrived in Dallas, Mark Gunn had found out about ICBIY's amnesty program offered to other store owners who had sold counterfeit products. Gunn mailed a letter in October 1994 to other franchise owners, pointing out that he and his brothers were the only ones who had lost their franchises during the counterfeit scandal. He accused ICBIY of being singularly concerned about its bottom line while store owners were being "eaten alive" by the high cost of the company's yogurt.

It was no wonder, Gunn wrote, that counterfeit yogurt was "prevalent" in the ICBIY chain.

James Amos, the company's chief executive officer, responded with a letter of his own on November 4, 1994, which has been entered as an exhibit in the court case. The letter, addressed to "Our Franchise Family and Associates," accused the Gunns of being deadbeats and counterfeiters and urged other store owners not to give their protests much credence.

In particular, Amos took issue with Gunn's contention that counterfeiting was "prevalent in the ICBIY family."

"That statement is patently false," Amos wrote. "There are approximately fifteen franchisees and forty nontraditional sites that have used counterfeit product. This accounts for 150,000-200,000 gallons of product."

Amos went on to pledge that ICBIY "stands on the fundamental values of Trust, Respect, Accountability, Integrity, Commitment and Caring. We have and will, in every endeavor, attempt to do the right thing for the greater good."

The Gunns read the letter and in February sued ICBIY for defamation. It was in the course of that lawsuit that Steve Khoury, the Gunns' Dallas attorney, happened upon the revelations about powdered milk. While deposing the company's head of manufacturing, Khoury says, he learned of the switch from fresh milk to powdered milk in the manufacturing process.

Shortly thereafter, Khoury amended the Gunns' lawsuit, claiming fraud, conspiracy, deceptive trade practices and breach of fiduciary trust on the part of ICBIY.

For several years, the suit now charges, ICBIY continued to claim that its yogurt was made from only the finest ingredients and kept raising the prices it charged store owners for the product.

But, the Gunns' suit claims, "since 1990 [ICBIY and Brice Foods] have continued to change their manufacturing ingredients from the freshest, highest quality standard to other cheaper, inferior components."

What's worse, the suit alleges, is that ICBIY never told store owners or customers that it was changing the frozen yogurt. They "have incessantly represented and communicated to franchisees, consumers...and the public generally that their yogurt was made with milk fresh from the farm, and that as a result their product was of the highest quality and was equivalent to `food of the Gods.'"

Mark and Frank Gunn, the original plaintiffs in the suit, have now been joined in the legal action by their brother Doug, father Marvin and Joyce Ann Bromley, a friend and former ICBIY franchise owner. They hope to show that ICBIY defrauded them with its claims about the quality of its yogurt.

The controversy comes at a bad time for the company.
From its peak of 400 stores, ICBIY now has only 220 left in the United States. In September the company announced that, beginning next year, it will stop charging franchise owners royalties on the yogurt they sell.

The company hopes the move will bolster the bottom line of marginal stores and keep ICBIY's network of outlets from growing even smaller, Herskowitz says. "The system has been losing money," he adds.

ICBIY officials call the lawsuit an effort by the Gunns to escape accountability for their own behavior. They steadfastly insist that the powdered milk has not changed their product and that no one has been misled.

Still, not long after the fraud charges were raised in public court documents, ICBIY sent special packages to its franchise owners.

The packages contained new nutritional brochures, the ones meant to be set out on counters for customers to peruse. An accompanying letter instructed store owners to "destroy all of your current stock" of old brochures.

The new brochures included "updated copy," the letter noted. Among the updates was one significant deletion. The brochures now on the counters of ICBIY stores make no mention of the company operating its own dairy.

David Pasztor is a staff writer at the Dallas Observer, Westword 's partner paper in Texas, which is where this story first appeared.

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